Options: J&J Looks Range-Bound

An investor selling a 'strangle' is showing no fear in the face of upcoming earnings from JNJ.
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By Jud Pyle, chief investment strategist for the Options News Network

Johnson & Johnson


frequently has gotten press during this bear market as being a typical safe haven stock.

The idea of safe haven was that the health care and consumer product company's business was immune to a recession and that the shares could hold up. Well, despite that notion, the stock has managed to slip from over $70 this summer, to around $60 today. But based on options activity today, there is at least one investor who thinks the stock will hold the $60 level for a little while.

In the first 30 minutes of trading this morning after the open, an investor sold over 6,500 of the Feb 55-60 strangles for around $2.95. That means that the investor is selling the Feb 55 put and the 60 call simultaneously. In this case, they are selling the 55 put for around 1.15 and the 60 call for around $1.80.

So why might the investor be selling this strangle? Well, for starters, they have maximum profit of $2.95 if the stock is between 55 and 60 at February expiration. Since the decline in the shares from the $70 level last September, the stock actually seems to have found a range. It bottomed around $55.50 three times, Oct. 10, Nov. 20, and Dec. 1. It also has been hard pressed to break out above the $60 level.

Another thing that is interesting in this trade is that the investor is showing no fear in the face of upcoming earnings from JNJ. Earnings for JNJ are scheduled to be Jan. 20, before the market opens. Despite that potential catalyst for a move, the investor is still selling this strangle.

Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."